The Hindu Business Line : Fears of US slowdown haunt IT companies

Blues in the horizon
Analysts feel the impact of the unexpected surge in rupee witnessed last week on the margins is manageable compared to that of the last quarter.
A one per cent rupee rise has an impact of anywhere between 20-50 basis points on the operating margins of the top-tier Indian IT firms.
While there are concerns of a US slowdown, nothing is visible on the ground as yet.

Vishwanath Kulkarni

Bangalore, Sept. 24 Fears of an economic slowdown in the United States has become a major concern for the IT services firms, which earn over 65 per cent of their revenues from the North American region. The rupee’s appreciation against dollar has now been relegated to the backseat for time being.

“It’s the uncertainty in the US that’s more a cause of worry now,” said an analyst with a foreign brokerage. “The scene in the US is not very clear. If there is a slowdown, volumes might take a dip.”

Analysts feel the impact of the unexpected surge in rupee witnessed last week on the margins is manageable compared to that of the last quarter, when the rupee appreciated sharply by eight per cent.

A one per cent rupee rise has an impact of anywhere between 20-50 basis points on the operating margins of the top-tier Indian IT firms.

“I guess the impact of rupee on margins is manageable this quarter,” said Mr Harit Shah, IT analyst at Angel Broking. Major IT firms had forecast their revenue projections for the second quarter based on exchange rate of Rs 40.50 to a dollar.

However, with capital flows set to mount, concerns over further appreciation in rupee remain, sources said. While there are concerns of a US slowdown, nothing is visible on the ground as yet. The focus would now shift to the IT budgets of US firms for 2008, which would be firmed up over the next three months or so.

Long term problem

“While a strong rupee still remains a cause of concern, what is more worrisome is the emerging scenario in the US and annual wage inflation of 15-20 per cent,” Mr Shah said. Though is too early to guess the possible impact of a slowdown in the US, it would depend on how things pan out. “In the event of a slowdown, IT firms could face a problem with volumes and may find it difficult to get a hike in billing rates” Mr Shah added.

“The rising rupee and the developments in the US are both a cause of concern,” said Mr Rajesh Ramaiah, corporate treasurer, Wipro Ltd. The appreciating rupee remains a concern in the short-to-medium term, but the bigger impact could be from a possible slowdown that could be long-term in nature, Mr Ramaiah said. Wipro had earlier indicated that it expects margins to remain flat for the second quarter.

The TCS chief operating officer, Mr N.Chandrasekaran recently said the company saw no signs of a slowdown in the US and was not facing any pressure on the pricing front.

IT stocks under pressure

Reflecting the concerns, majority of the frontline IT stocks were down on Monday while the BSE Sensex hit a new high at 16,845. Infosys was down 3.22 per cent at Rs 1,763.23, while Satyam lost 2.32 per cent to close at Rs 409.15. TCS was down about a per cent at Rs 1,005.95, while Wipro gained marginally at 442.75.

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